Big US banks reap windfall profits from Federal Reserve rate hike

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Three of the largest U.S. banks reported increased profits by charging more for loans as the Federal Reserve’s series of interest rate hikes inflated their results.

JPMorgan Chase, Citigroup and Wells Fargo collectively earned $49 billion in net interest income in the second quarter, the difference between what banks pay for deposits and what loans and other assets earn.

The figure was 30% higher than the same period last year and shows how some lenders have been able to cash in since the start of Fed tightening in March 2022.

While charging more for loans, the biggest banks have managed to avoid paying depositors much more. JPMorgan, the largest US bank, raised its forecast for net interest income for the full year from $84 billion to $87 billion. Chief Financial Officer Jeremy Barnum credited higher rates coupled with lower-than-expected deposit repricing.

JPMorgans’ deposits rose 1% in the quarter to just under $2.4 billion, boosted by its acquisition of failing regional lender First Republic in May. Barnum told analysts that banks’ net interest income was unsustainable at the current high level and would eventually decline as competition for deposits played out.

Jamie Dimon, Managing Director, added that there is no circumstance we have ever seen in the history of the bank where competition has not intensified in a rising rate environment, whether from other banks or alternative products such as money market funds. Were going to have to compete for that. You already see it in some parts of our business and not in other parts.

Not all US banks benefited as much. As depositors favored larger banks in a flight to quality, smaller banks came under greater pressure to raise deposit rates, hurting their profit margins.

The State Street custodian bank, whose customers turn to big institutions that often seek better savings rates, warned on Friday that it had to pay higher interest rates to customers to keep deposits, leading to a tumble of 10% of its shares.

The flip side of the rate hike has been additional pressure on borrowers across the economy, with concerns about defaults, particularly in commercial real estate. JPMorgan in the second quarter also set aside $1.5 billion net in reserves to cover potential loan losses.

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Exceptional lending profits offset lower investment banking fees, which fell 6% to $1.56 billion for JPMorgan and 31% to $686 million for Citi.

Citi chief executive Jane Fraser said the investment bank’s long-awaited rebound had yet to materialize, leading to a disappointing quarter.

Overall, JPMorgan said net profit jumped 67% year-on-year to nearly $15 billion, easily beating analysts’ estimates. Wells, the nation’s fourth-largest lender, said its profits rose more than 50% from a year ago to nearly $5 billion. Citis profits fell by more than a third, hit by slowing business spending, a dearth of deals and a series of costly layoffs.

Wells told shareholders net interest income is expected to rise about 14% this year from 10% previously, and Citi forecast more than $46 billion in net interest income, up from an earlier forecast of $45 billion. dollars.

Rivals Bank of America and Morgan Stanley release earnings Tuesday, while Goldman Sachs releases earnings Wednesday.

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